Researchers to be liable for losses
A law firm has warned that ratings houses could be partially liable for money lost by investors in financial products they rate, following a landmark ruling in the Australian Federal Court.
Corrs Chambers Westgarth partner Rommel Harding-Farrenberg cautioned rating agencies, investment banks and investment managers to tread carefully when promoting financial products, after the Federal Court found investment research and ratings house Standard & Poor’s (S&P) engaged in misleading and deceptive conduct when it gave a top AAA rating to CPDOs - a highly leveraged financial product marketed as Rembrandt notes.
“This new and significant development follows a recent case where the court found rating agencies, investment managers and others can owe a duty of care to investors,” Harding-Farrenberg said.
“If a financial product has been inappropriately rated or marketed, the rating agency, originator and investment manager could be held accountable,” he added.
“On the one hand, this is a good result for investors. On the other, it should spark major changes in the due diligence and analysis process undertaken by rating agencies and other involved parties.”
The court found that S&P based the AAA rating solely on information provided by the creators of the product, ABN AMRO. Following large-scale investment, the value of Rembrandt notes plummeted, causing severe financial loss for investors.
As a result of the AAA rating, 13 councils in NSW invested $16 million in Rembrandt notes through an investment manager which had purchased $45 million worth of the notes itself.
The councils brought successful claims against S&P as well as ABN AMRO and the investment manager.
“This decision could have major global implications in relation to litigation pending against rating agencies in the United States and elsewhere,” Harding-Farrenberg said.
“The court will not impute responsibility simply because an investor has suffered losses.
“However, if there is evidence there was no reasonable basis for a rating, or where a rating analysis is not a result of an exercise of reasonable care, then rating agencies, developers and marketers of financial products may be vulnerable.”
Recommended for you
As advisers risk losing two-thirds of FUA during the $3.5 trillion wealth transfer, two co-founders underscore why fostering trust with the next generation is vital to retaining intergenerational wealth.
As advisers seek greater insights into FSCP determinations, what are the various options considered by the panel and can a decision be appealed?
Amid the current financial adviser shortage, advice firm Link Wealth is looking to expand its financial literacy program for high school students across the country.
TAL Risk Academy has updated its range of ethics courses to help financial advisers meet their CPD requirements following adviser feedback, including interpreting FSCP determinations.
